At its core, investment capital is the funding needed to pay for material assets for example buildings, land, physical facilities and equipment with a functional life of one year or more. Increasingly, investment capital is also being used for other reasons: to allow organisations to expand their fundamental strategies and programs, and to develop the abilities and skills of their staff.
Start-up investment capital is often the lifeblood of a new business. Many times, it is the only thing separating a successful company from a failing one. Private investors are persons who invest in your business during your company’s creation stages. They are typically family and friends. In the early stages you might also find an angel investor: a wealthy individual or group of investors specialising in funding start-ups.
Angel investors form part of the venture capital industry, and lately they have been stepping up to larger, more complicated investments. ‘Angel groups’ are being formed as these investors band together to gain access to more deals. Angel investing frequently targets high-potential quarters, for example social media, the Internet, biotech, medical devices and the like, and its growth is good news for entrepreneurs.
Entrepreneurs can also use equity financing options to raise capital from venture capitalists. Venture capitalists anticipate a hefty return when they offer equity financing. This return can come in the form of an initial public offering, an acquisition, or a stock buyback later on. The advantage of this type of funding is that the entrepreneur can focus on making his or her product profitable instead of worrying about paying back the venture capitalist right away.
Venture capital is smart for new businesses that have just started operations and that are not large enough to raise capital in the public markets. These young firms may not have reached the point where they can complete a debt offering or secure a bank loan. Nearly two million businesses are created in the US each year, and around 600-800 of these get funding from venture capitalists.
Raising investment capital is a sales job, and you need to engage the investors you’re pitching your product to. You need to clearly define what problem you’re solving in the market, and why your business is the one to address it. From the start of fundraising to the finish it often takes three months, although it can take more than that. Ensure that you do due diligence on your angel investors and venture capitalists.
Your investors measure the return on their investment capital by calculating it as a percentage of the company’s total assets. The higher the percentage, the better your company is doing. Calculate your company’s total assets by adding the value of the long-term debt to the value of the preferred and the common stock. Subtract any dividends paid from your business’s net income. Divide your company’s income after dividends by its total assets, and multiply the result by 100 to find the percentage.
Angel investors and venture capitalists often use their own funds when they invest in a start-up company. During the critical early phase of development, they offer much needed experience and expertise to new businesses. These investors will frequently ask for a high return on investment to make up for any losses. This is because investing in early-stage companies with no demonstrated history is always a risky undertaking.